You may have noticed that mini umbrella companies have made the headlines again – most notably on the BBC website after an investigation by Radio 4’s File on 4 team. We’ve summarised mini umbrella company fraud, and why agencies should never refer to non-compliant payroll companies, and why contractors must ensure their payroll is in safe hands.
Mini umbrella companies exist in their tens of thousands
An investigation by the BBC Radio 4’s File on 4 team found that over 45,000 mini umbrella companies have been set up in the UK within the last five years. The same investigation also found that some of the Covid testing centres run by G4S have employed workers engaged with mini umbrella companies.
What is mini umbrella company fraud?
HMRC is well aware of mini umbrella company fraud. Still, they admit, “there is no standard mini umbrella company fraud model and arrangements are constantly evolving as organised criminals try to hide their fraudulent activities from HMRC”.
Criminals are setting up small companies in huge numbers to take advantage of tax loopholes such as the Employment allowance and VAT Flat Rate Scheme. Unethically-minded professionals are profiting by creating mini umbrella companies by encouraging recruitment agencies to refer candidates to mini umbrella companies. HMRC is losing out on millions of pounds of tax.
The BBC Radio 4’s File on 4 investigation found that recruitment agencies were deliberately referring their candidate to mini umbrella companies – for their own financial gain. The BBC’s article perfectly explains how it works.
“It works by exploiting the government’s Employment Allowance – an annual discount of £4,000 per company on National Insurance contributions. The allowance was meant to encourage companies to take on more workers.
However, recruitment agencies exploit the allowance by employing temporary workers through a series of mini umbrella companies – or “MUCs”.
Each individual MUC has only a small number of workers and qualifies for the tax relief. These kind of arrangements can cost the taxpayer hundreds of millions in lost tax revenue a year.”
It is worth noting that while the latest developments show that recruitment agencies were making unethical referrals to line their own pockets, some mini umbrella companies have targeted temporary workers directly (promoting tax avoidance). Usually, these schemes promote unrealistically high take-home pay as the main incentive to using their service, and they’ll pretend they’re “fully compliant” and “HMRC friendly”. Never be tempted to use such a company!
How to spot a mini umbrella company
HMRC have released some pointers to help parties in the supply chain of temporary workers to spot and avoid mini umbrella companies.
- Weird company names – very different from what you would expect for an established payroll provider.
- Their official Companies House listing suggests they’re not linked to the industry you’re led to believe they are.
- Directors are not UK nationals and are not experienced with UK tax laws.
- Workers (those being paid through a mini umbrella company) are regularly moved between companies. This may be apparent by having a number of different companies on a worker’s payslips.
- The company has not been around long – under a year.
Advice for recruitment agencies
Never be tempted to refer candidates to payroll providers you do not trust. Not only is it unethical, but both your candidates and your business could suffer. HMRC is always stepping up its efforts to catch those facilitating tax avoidance schemes, and the penalty you could face may result in the end of your agency. It’s also worth thinking about the consequences of being publicly shamed for referring to mini umbrella companies. The damage could be irreparable.
Advice for contractors, freelancers and agency workers
Two things are certain in life – death and taxes. As a UK worker, you’re expected to pay your fair share of tax and National Insurance Contributions (NIC). Here are some tips to ensure you don’t use mini umbrella companies or tax avoidance schemes. Carrying out thorough due diligence is essential.
- Only use a contractor accountant or umbrella company accredited by a well-respected professional body in the UK.
- Ensure the payroll provider you use hasn’t been issued with a Scheme Reference Number (SRN) by HMRC because it means they’re under investigation.
- Read payslips carefully, and check you’re being paid by who you should be and that the deductions to your gross pay are legitimate.
- Check the reviews of any payroll provider you consider using, and make sure they have happy clients.
- Only consider using well-established companies.
- Never feel pressured into using a provider you’re not fully satisfied with.
- You should contact HMRC if you think something dodgy is going on.
Further reading
We recommend you read the following articles and report – they’re very useful indeed!
Government Guidance: Mini umbrella company fraud
Government Guidance: Working through an umbrella company
Government Guidance: Disclosure of tax avoidance schemes
